The renewable energy business drove a revaluation; maintaining the “buy” rating and raising the target price, Ganghua Smart Energy (GAC) recorded 2021 revenue of HK$1.71 billion, up 34% year on year, and net profit of HK$1.25 billion, down 13% year on year; core profit (excluding fair value changes from the parent's net profit) increased 11% year-on-year to HK$1.61 billion, falling short of our expectations of HK$1.81 billion.
Sales volume increased 21% year on year, but gross sales margin decreased by 0.06 yuan/square meter year on year. We are optimistic about the company's renewable energy business. We expect net profit of $1.74 billion/$2.21 billion/HK$2.83 billion for 2022-2024 (previous value: $2.04 billion/$2.32 billion/- HKD). The share of renewable energy profits is expected to increase. Switching to the SOTP valuation method, we gave the company's renewable energy business/city gas business 25/12 times the projected PE for 2022 (forecasted net profit of 150 million/HK$1,593 million). We gave the company a target market capitalization of HK$22.9 billion for 2022, corresponding to a target price of HK$7.23. Reiterate the “buy” rating.
Sales volume continues to grow, but sales margin narrowed
The company's gas sales revenue in 2021 increased 36% year over year to HK$15.5 billion, and gas sales increased 21% year over year to 14.6 billion cubic meters. Benefiting from clean energy policies, we forecast a 12% increase in the company's gas sales in 2022 (previous value: 14%), with industrial/commercial/residential gas sales increasing 14%/9%/7% year over year.
Upstream gas prices have been fluctuating at a high level since the second half of 2021, causing the company's gas sales gap in 2021 to narrow by 0.06 yuan/square meter year-on-year to 0.51 yuan/square meter. As a result, we lowered the operating margin forecast for the company's gas sales in 2022 from 9.2% to 8.4%.
Renewable energy business forms a second growth curve
The company aims to develop 200 industrial parks by 2025, and the planned installation scale of distributed photovoltaics will reach 15 GW. We expect the company's cumulative installed capacity to reach 1/3/5/8 GW in 2022-2025, respectively. Assuming that the number of hours used is 1,100 hours, the private electricity price is RMB 0.70 per kWh, the feed-in price is RMB 0.35 per kWh, and the interest rate is 4%, we predict that the net profit of the company's renewable energy business is expected to reach 150 million/599 million/1,198 million dollars/1,947 million Hong Kong dollars in 2022-2025, forming a second growth curve for the company's performance.
Changes in profit structures drive value revaluation
We forecast the company's net profit to the mother for 2022-2024 to be 1.74 billion/2.21 billion/HK$2.83 billion, EPS of 0.55/0.70/0.89 HKD, and the corresponding CAGR of 21%. The profit share of the renewable energy business is expected to increase significantly, so we have switched to the SOTP valuation method. Referring to the renewable energy business, the average PE value of the company in 2022 was 24 times. The company's net profit growth rate was higher than the average of comparable companies. The renewable energy business was given 25 times PE; the company's urban gas business was given 12 times PE, which is the same as the 5-year historical PE average. We have given Ganghua Smart Energy a target market value of HK$22.9 billion in 2022, corresponding to a target price of HK$7.23 (previous target price of HK$7.14, based on 12 times the PE forecast for 2021).
Risk warning: China's gas sales growth is slowing down; demand from industrial users is weak; electricity prices for industrial and commercial customers are falling.